New requirements for businesses to manage their tax records digitally will take effect from April 2018

HMRC logo and coins - Image credit: PA Images

HMRC will pilot its digital tax reforms on “hundreds of thousands” of businesses before roll out, but is maintaining its initial timeline for implementation – despite MPs branding it “wholly unrealistic”.

The UK tax authority, which aims to be the world’s most digitally advanced through its Making Tax Digital plan, has responded to its three-month consultation on the reforms.

The HMRC plan, which will require businesses to keep records digitally and produce quarterly updates, aims to reduce avoidable errors in tax returns, estimated at £8bn a year.

However, the plan has come under fire from both businesses and the House of Commons Treasury Committee for placing too great a burden on taxpayers in too short a timeframe.

In its report into the scheme, published earlier this month, the Treasury Committee said that initial start date of April 2018 for income tax was “wholly unrealistic”, and that just over a year was “too short a lead time for such a fundamental change” to the tax administration system.

HMRC’s response to the consultation acknowledges concerns about the pace of change and capability of businesses to meet the requirements, but maintains that the transition will be “straightforward” for most businesses because they already use digital tools on a regular basis.

Instead, HMRC highlighted plans to conduct a year-long pilot, to start in April 2017, which will work with “hundreds of thousands of businesses and landlords” on quarterly returns and digital record keeping.

“This will ensure the software is user-friendly and give individuals and businesses time to prepare and adapt,” HMRC said.

Meanwhile, in an effort to address concerns about the abilities of businesses to deal with the technological side of digital record keeping, HMRC said that spreadsheets can be used to record receipts and expenditure – as long as businesses still meet the requirements of the reforms.

It added that it was working with software developers to “ensure there is a good choice of products” available and that it planned to provide guidance to businesses in choosing the right software for their needs.

This will take the form of a register on GOV.UK, which will confirm which apps are registered with HMRC and are compatible with Making Tax Digital “in good time for the start…in 2018”.

The authority added that a final decision on what further help HMRC will provide to businesses, including on financial support and training, will be made before legislation is laid later this year.

HMRC also said that businesses would not have to make and store invoices and receipts digitally, which it said many had been “particularly concerned about”, and that charities would not need to keep digital records.

Elsewhere in the consultation, respondents raised concerns about security, which HMRC said would be dealt with in detail early this year in a wider set of documents setting out the working relationship between the authority and the software industry.

The government also noted that some respondents had estimated the costs of implementing the changes could be in the thousands of pounds, but offered its own estimate of transition to the system as £280 per business over the period 2017-18 and 2020-21.

This would include time spent getting used to new digital tools and the quarterly submissions, buying new apps and software upgrades, it said.

“Once businesses have transitioned to regular digital record keeping, the obligation to provide quarterly updates to HMRC is expected to result in an overall reduction in burdens compared to the current once a year report requirements.”

The UK Government has estimated that the reforms will save £945m by 2020-21 and £2bn by 2021-22.